I never spoke about my financial travails, not even with my closest friends—that is, until I came to the realization that what was happening to me was also happening to millions of other Americans, and not just the poorest among us, who, by definition, struggle to make ends meet. It was, according to that Fed survey and other surveys, happening to middle-class professionals and even to those in the upper class. It was happening to the soon-to-retire as well as the soon-to-begin. It was happening to college grads as well as high-school dropouts. It was happening all across the country, including places where you might least expect to see such problems. I knew that I wouldn’t have $400 in an emergency. What I hadn’t known, couldn’t have conceived, was that so many other Americans wouldn’t have the money available to them, either.

The article is worth reading if only to track the spending habits and lifestyle of someone who has done well income-wise, but now is caught in a huge financial trap, and things will only deteriorate from there. Gabler tries to find and fix the blame, and it ranges from the banks to individuals to “keeping up with the Joneses.” That is all well and good, but he fails to point out the role of the Federal Reserve System and the poisonous ideology that undergirds all Fed actions: Keynesianism.

No Emergency Funds: A Triumph for Keynesians

There is a sad irony in Gabler’s article, and that is that what he understands as a real financial crisis in middle-class households actually is the ideal state of things via the Keynesian lens of economic thinking. In the upside-down world of Keynesianism, the fact that most Americans now live hand-to-mouth without any appreciable savings is a triumph and is the key to prosperity, at least in the Land of Keynes. Let me explain.

In the 1950s, the so-called Keynesian Revolution began to steamroll its way through American university faculties as “The New Economics” became the rage. John Maynard Keynes, in his alleged “path-breaking” book, The General Theory, had demonstrated that far from blessing an economy with the means of capital formation, household savings actually were a curse and when “too many” households saved too much money, the so-called Paradox of Thrift would take hold and actually drive down the economy into the dreaded Liquidity Trap.

Americans at the time either were not aware of this new Holy Doctrine and continued to save. For example, I knew a single mother who for most of her working career made little more than minimum wage, yet upon retirement was able to purchase a home with cash for $100K and she has continued to live well into her 90s. Her mother and father were poor farmers, yet they managed to save an astonishing amount of money despite their very low incomes.

This was not unusual back then. Americans were known for their savings habits and continued to save even as Keynesian economists began to admonish them for denying that the economy needed “spending” to keep us at “full employment.” Like all Progressives, Keynesians believed that if Americans were not willing to do what was necessary to sustain full employment levels, then the federal government would need to “nudge” them in compliance, and American politicians were all-too-happy to earn the praise of the professoriate.

And so little by little the US government changed this country’s economic landscape in order to conform to the Keynesian “ideals.” The most important official change in American policy was the promotion of inflation. True, officials claimed that inflation was a bad thing, and could be “fixed” by application of wage and price controls, but at the Keynesian-dominated Federal Reserve System, officials already were setting “inflation goals” in order to keep the economy from slipping into deflation.

While Keynesian “theory” sprouts many myths, one of the main ones is that inflation (read that, monetary debasement) helps to create full-employment and that it is necessary because, if left to its own devices, a free-market economy quickly will deteriorate into a downward deflationary spiral and end up in a perverse “equilibrium” in which unemployment is high and economic activity is low. Only inflation can stop the spiral, and if it isn’t “high enough,” according to Keynesians, then the system will implode into the depths of deflationary depression.

To Austrian economists, none of this makes sense, at least if one is speaking about real economics, not politics. If Keynes were correct, then the government’s inaction during the recession of 1921 would have resulted in a major depression during the 1920s. For that matter, since the government had not intervened in previous depressions and recessions, the Keynesian logic would have meant that the US economy would have been in permanent depression.

The Benefits of Saving and Investment

The historical results parallel economic theory. Economies do not grow because governments inject doses of “aggregate demand;” they grow because entrepreneurs develop better uses of factors of production that permit more goods to be produced and also allow for more resources to be applied in areas where they have not been used, or at least used in lesser amounts.

Take the development of the washing machine, for example. Before washing machines were developed and made available to households, washing clothes was a huge chore that might take at least one day and maybe even longer than that. For the most part, household laundry chores were performed by women who worked for hours to clean clothes and other materials.

Washing machines, however, enabled housewives to do more laundry in less time, thus allowing them to apply some of their other skills elsewhere. Multiply this sort of thing across an economy, and one can have an idea how the development of such goods enables economic growth.

Contra Paul Krugman and other modern-day Keynesians, capital formation does not exist as a “given.” Instead, capital formation not only is a function (to use a mathematical term loosely) of savings, it must be so because modern economies involve a mix of capital and consumer goods, and their ratios are related to individual time preferences. One cannot consume all of its present production and simultaneously abstain from consumption in order to create capital goods that will produce more consumption goods in the future.

For example, if people (like our ancestors) are willing to save large portions of their incomes, it is not because they are irrational or are “hoarding” money (as Krugman would tell us), but rather because they wish to postpone some current consumption in order to be able to consume more in the future. Investors take that savings pool and then invest in the kinds of capital goods that would allow for the creation of even more goods to be consumed at a future time.

The key indicator in whether or not investors are going to invest in long-term capital (that results in fewer consumption goods made in the short run, but brings about much more consumption in the long run) is the interest rate. In a free-market economy, low interest rates mean that individuals are saving large amounts of their income, making a larger pool of “liquid capital” available, while high interest rates indicate that consumers prefer to consume now and save less — precisely the state of things right now.

Keynesians, on the other hand, claim that since the true economic “multiplier” is equal to 1 over the rate of savings, then the less a society saves, the more economic growth that economy will experience. (For example, if all individuals in a society save 10 percent of income, then that economy has a multiplier of 10. If the individuals save 5 percent, then the multiplier is 20. It reminds me of the ditty we used when I was in school in which we “proved” that the less we studied, the more we knew.)

Low Interest Rates vs. Reality

Of course, interest rates are not high, and certainly don’t reflect societal time preferences. A society featuring a dearth of savings should have high rates, not low ones. Gabler’s article chronicles a life of spending and not saving, whether it is paying for a daughter’s wedding or coming up with large amounts of money to pay for a pricey elite college education for the children. With the Fed suppressing interest rates to less than 1 percent, there almost is no incentive for people to put money into savings accounts, given there is almost no appreciable return, and few of us are equipped to enter the equities markets without making serious investment errors. Multiply that across the economy and one finds a dearth of savings and a preference for present consumption — exactly what Keynes and his modern-day followers claim is the formula for prosperity: we spend ourselves into wealth.

So, we are left with a huge irony. We have low interest rates, but clearly the kind of long-term capital investment is not common in the US economy at the present time. Firms and entrepreneurs are investing in long-term capital overseas, but not here, given that even while politicians such as Bernie Sanders, Donald Trump, and Hillary Clinton are decrying that fact. Of course, given the hostility of the American Political Class to private investment and given the fact that Sanders is running a campaign based on attacking and ultimately destroying private enterprise in the USA (with Clinton not far behind), investors are reading the tea leaves and taking their money elsewhere, something that infuriates the Political Class.

(Not surprisingly, the Political Class is demanding laws that effectively would build a Berlin Wall around American investment, making it illegal for Americans to invest outside this country. One does not need to be very astute to know immediately what a disaster that would bring, but given that the Political Class exists by looting others, its members would be somewhat shielded from the economic carnage.)

Lest anyone doubt that current American savings rates are low, the chart below presents an ominous picture. It also demonstrates beyond a doubt that the biggest offender in conducting policies that discouraged savings was not the Obama administration — as bad as it is but the Bush administration with its housing bubble and exposed what Peter Schiff often has called the “phony economy.”

The chart itself exposes much about the past 35 years that is harmful to the economy. Yes, there has been the rise of the high-technology sector and the improvements in transportation and telecommunications, thanks to the deregulation efforts of the Carter administration (something for which Carter never takes credit because his Democratic Party ideology tells him that private enterprise and profit are bad things).

The steepest drop in the rate of savings came with the Clinton and George W. Bush administrations, and I don’t think that we should be surprised that during those years, the Fed actively pushed down interest rates and helped create two massive financial bubbles, each of which burst and created destruction in their wake. From the Fed’s own statistics, savings has somewhat recovered during the Barack Obama years, even though Obama’s administration is extremely hostile toward savers.

But here we are. After decades of what essentially could be called a new “Industrial Revolution” with the advent of computers and the internet, the US government has managed through its monetary authorities and through its other policies to decimate savings and leave millions of Americans financially vulnerable.

It has been no accident. People are able to resist force only for so long before giving in, and given that the Keynesian war on savings has continued unfettered for decades, and has been blessed at the highest levels of government and academe, not to mention touted in the news media, we should not be surprised that people save less. We also should not be surprised to know that all of us will pay a steep price for this spendthrift way of life, even as the political classes scramble to protect themselves from the consequences of their actions.